Entrepreneurs, Operating Managers and Business Owners are all seeking new sources of working capital for their businesses in an environment that is extremely challenging. Trying to sort out the tangled mess of claims and counter claims surrounding the terms and availability of business credit and/or working capital can be a confusing maze. This can be made all the more difficult if your business is not a "prime" credit candidate for many types of working capital.
Unfortunately, many, if not most, businesses find themselves in this non-prime credit category due to tightened underwriting conditions by most commercial banks. Put simply, banks don't want to lend, no matter how much the US government wants them to.
For those who are investigating the cost effectiveness of new forms of working capital for a business that may have credit issues, a couple of important items need to be remembered.
1.) Personal Guarantee- Most sources of alternative working capital will require a personal guarantee from the business owner. That means the owner is the person they will go to should the loan go bad. Almost all lenders in this lending space require this, so if you are not prepared to do this, your options will be extremely limited, if not zero.
2.) UCC Filing- While often these sources of capital you may have seen portray themselves as "unsecured" this isn't entirely true. While they may not require physical assets as an underwriting condition of funding the loans, such as equipment or buildings, they almost always require that a UCC lien is placed against the business. A UCC filing stands for Uniform Commercial Code, and is a legal vehicle for a lender to place a lien against the assets of the business in the event of non-payment. This means that if the loan goes bad, the lending entity will get a cut of the liquidated assets to pay off the balance of the loan or cash advance before the owner does. If you aren't prepared to have a UCC lien placed against your business, your choices for alternative working capital will also be very limited.
3.) Time in Business- If you are a start up, or have been in business less than one year, you are better off trying to secure the funds personally on your own credit rather than attempting to get a loan against your business. Very few, if any lenders will take a business that has been open less than a year, and most want to see at least 2 years of history.
4.) Cash Flow- As part of their "alternative underwriting" most sources of working capital that are not made by commercial banks are going to look very closely at the businesses cash flow as the source of repayment. This cash flow will be checked and verified through the business bank statements as well as the credit card processing statements. If you have a lot of NSF's on your checking account or a high refund rate on your credit card processing statements, you will have a difficult time getting approved. A general rule of thumb for lenders is that they will make a loan on up to 150% of your average credit card processing volume over the previous 4 months. This same rule of thumb is applicable for cash businesses with an additional requirement of having an average balance of $2500 or more in the business checking account for the previous 4 months. Bottom line; don't think you will get 150K if you are only averaging about $20,000 per month in volume.
5.) Payment Structure- Alternative lenders tend to keep their considerable risk to a minimum by keeping short terms, usually of 12 months or less. Conversely, their average loan is somewhere around $30,000. Therefore, they collect smaller payments daily, usually between 5 and 7 times per week automatically as the credit card sales are batched at the end of the day. Usually the "holdback" or amount of the payment they take can range from 10-30% of the total daily processing amount. If a cash program is being used, the payment amount will be deducted electronically from their business checking account. Most loans are "fee based" loans, which means you can pay them back early, but there is no interest advantage to doing so. You pay the full amount of interest no matter how long the loan is kept.
Unfortunately, many, if not most, businesses find themselves in this non-prime credit category due to tightened underwriting conditions by most commercial banks. Put simply, banks don't want to lend, no matter how much the US government wants them to.
For those who are investigating the cost effectiveness of new forms of working capital for a business that may have credit issues, a couple of important items need to be remembered.
1.) Personal Guarantee- Most sources of alternative working capital will require a personal guarantee from the business owner. That means the owner is the person they will go to should the loan go bad. Almost all lenders in this lending space require this, so if you are not prepared to do this, your options will be extremely limited, if not zero.
2.) UCC Filing- While often these sources of capital you may have seen portray themselves as "unsecured" this isn't entirely true. While they may not require physical assets as an underwriting condition of funding the loans, such as equipment or buildings, they almost always require that a UCC lien is placed against the business. A UCC filing stands for Uniform Commercial Code, and is a legal vehicle for a lender to place a lien against the assets of the business in the event of non-payment. This means that if the loan goes bad, the lending entity will get a cut of the liquidated assets to pay off the balance of the loan or cash advance before the owner does. If you aren't prepared to have a UCC lien placed against your business, your choices for alternative working capital will also be very limited.
3.) Time in Business- If you are a start up, or have been in business less than one year, you are better off trying to secure the funds personally on your own credit rather than attempting to get a loan against your business. Very few, if any lenders will take a business that has been open less than a year, and most want to see at least 2 years of history.
4.) Cash Flow- As part of their "alternative underwriting" most sources of working capital that are not made by commercial banks are going to look very closely at the businesses cash flow as the source of repayment. This cash flow will be checked and verified through the business bank statements as well as the credit card processing statements. If you have a lot of NSF's on your checking account or a high refund rate on your credit card processing statements, you will have a difficult time getting approved. A general rule of thumb for lenders is that they will make a loan on up to 150% of your average credit card processing volume over the previous 4 months. This same rule of thumb is applicable for cash businesses with an additional requirement of having an average balance of $2500 or more in the business checking account for the previous 4 months. Bottom line; don't think you will get 150K if you are only averaging about $20,000 per month in volume.
5.) Payment Structure- Alternative lenders tend to keep their considerable risk to a minimum by keeping short terms, usually of 12 months or less. Conversely, their average loan is somewhere around $30,000. Therefore, they collect smaller payments daily, usually between 5 and 7 times per week automatically as the credit card sales are batched at the end of the day. Usually the "holdback" or amount of the payment they take can range from 10-30% of the total daily processing amount. If a cash program is being used, the payment amount will be deducted electronically from their business checking account. Most loans are "fee based" loans, which means you can pay them back early, but there is no interest advantage to doing so. You pay the full amount of interest no matter how long the loan is kept.
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